A Perfect Storm?

(Previously published as a letter to the editor of the Leavenworth Times, March 2011)

Things aren’t going all that smoothly in the USA right now. There are lots of things to worry about, such as, but not limited to:

  • Federal and state budget deficits and outstanding debt;
  • Our policy of stifling domestic oil production;
  • Our dependence on foreign oil (and the money we pay for it);
  • Balance of trade deficits, causing loss of manufacturing industries and jobs;
  • Strife over public union bargaining rights;
  • A leftist president and a dipstick vice president;
  • The need to reduce massive federal spending, particularly on entitlements;
  • The prospect of looming inflation, caused by rising oil prices;
  • The problem with the Islamic world;
  • And much more.

We might look at these things and say, we have a Perfect Storm, a combination of ills that can’t get any worse. But, it could.

The expression, “Sound as a dollar” isn’t heard much anymore, for a good reason: it ain’t sound. The rest of the world watches the United States like hawks, and would pounce if they could. While the dollar is the world’s most widely held reserve currency, meaning most international trades (such as oil) are paid for in dollars, the rest of the world is grumbling about our unsound financial condition (debt exceeding our annual GDP, our big budget deficit, and the sick finances of almost every state.) Some want to set up a new primary reserve currency, and drop ours.

American went off the gold standard around 1900, and since then, every bill printed by the treasury has been an IOU, supposedly backed by gold in the depths of Fort Knox and the good faith of the American government. But there’s not enough gold there to stand behind a debt of fourteen trillion dollars. The larger our debt, the less substantial our dollar becomes.

Suppose the world lost all faith in the dollar. Suppose OPEC decided that they would only sell oil for EUROs. Suddenly, we would have to buy EUROs to pay for oil. Note that European countries currently have to buy dollars with their EUROs to purchase oil, and their prices are much higher for gasoline than ours. If that happens, according to experts like Porter Stansberry, our oil costs will likely go way up and we’ll be hit by massive inflation. Try, 100 per cent on everything, which would be like a 50% pay cut for everyone, even the public sector union folks who are fighting so hard for their bargaining power. This collection of molecules (me) would have to find a cheaper brand of dog food, while some folks would have to cut down to only two or three ocean cruises a year.

That would bring us closer to the Perfect Storm.

In truth, there are reasons why this may not happen.  The Islamic countries and China hold a lot of our dollars, and you wouldn’t think they would want to take a huge loss, but they aren’t exactly our friends, either. I believe it would totally wreck the Chinese economy. But who is rational, these days?

We’d better clean up our financial act very soon, balancing state budgets, reducing our public debt, and making a real effort to cut entitlement costs for state and federal governments. The alternative could be terrible.

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